Proposition 210, passed by California voters in 1996, increased the state's minimum wage to $5.75 an hour. This, however, will not help poor families nearly as much as its proponents suggest. Thomas MaCurdy, a senior fellow at the Hoover Institution, and Margaret O'Brien-Strain take an in-depth look at who prospers and who pays for this wage hike in a new Hoover Essay in Public Policy.
MaCurdy and O'Brien-Strain report that the bulk of increased earnings attributable to raising the minimum wage do not aid low-income families. About one in four families has low-wage workers who benefit from the 1996 minimum wage hike, and high-income families are as likely to contain these workers as are low-income families. Fewer than $1 in $5 of the additional earnings goes to families who rely on low-wage compensation as their primary source of income. Almost half the additional earnings from the higher minimum wage go either to the government as taxes or to the richest 40 percent of California families.
On the cost side, the minimum wage hike will drive up labor costs and, correspondingly, the prices of goods produced by low-wage workers. Families in the lowest 20 percent of the income distribution pay an average of $61 annually in higher commodity costs, whereas families in the highest 20 percent pay only $150 more. The implied coverage of costs is at least as regressive as a conventional sales tax. Moreover, nearly 75 percent of poor families receive no additional earnings, but all paid higher costs following the minimum wage. These findings reveal that minimum wage policy serves very poorly as an anti-poverty program.
In addition to being a senior fellow at the Hoover Institution, MaCurdy is a professor of economics at Stanford University. His research primarily explores the effects of policy designs on programs making up public assistance systems, such as welfare, earned income tax credit, food stamps, unemployment compensation, social security, Medicare, and Medicaid. O'Brien-Strain is a fellow at the Public Policy Institute of California and a research associate at the SPHERE Institute. Her research focuses on the study of welfare systems.
